Depression Era Gas Prices

Here is a condensed version of Bryce’s comments regarding my previous post on gas prices:

In the linked 'Percent of Income' graph, what caused the steep decline in the mid 1930s? That's still smack dab in the middle of the depression and before any WWII efforts, right? Starting in 1935 or so, the % income goes down sharply (from 48% to 35%). I wouldn't have expected the sharp decrease until WWII in '41.

I felt this astute observation deserved more than just a comment, because it took me a day to think about what happened. Looking at the data for the percent of income graph, in 1935 it is indeed we see that plunge as income raced ahead of gas prices, we might ask what happened in 1935? I first thought there was an earthquake just prior that may have disrupted things, but that was not true.

As it turns out, 1935 is the year the U.S. Supreme Court unanimously ruled in favor of Schechter in Schechter Poultry vs. the United States. This was a devastating blow to FDR’s new deal policies and hamstringed his ability to push his economic policies. When problems first surfaced, both Herbert Hoover and FDR engaged in endless experimentation with the rules of the game, causing the economic actors to freeze their behavior. The Schechter case undermined much of FDR’s policy experimentation and price fixing policies. The Schechter’s were guilty of lowering prices in the mind of FDR and his followers because they thought the problem was deflation. Once the supreme court ruled these policies unconstitutional, as well as undermined much of what would have ended up in the Wagner Act (1935) and the Fair Labor and Standards Act (1938), we saw the Dow Jones turn around in the Spring of 1935.

For more info on this case and the Great Depression, I would like to recommend this Podcast from EconTalk and this book.